Some people were surprised by BHP Billiton’s decision to abandon the $102 billion all share offer for Rio Tinto last night, but they shouldn’t have been.
The bid has been dead for months; On October 2, as world financial markets roiled in the wake of the Lehman Brothers collapse and other failures, Crikey wrote:
Regardless of what BHP Billiton’s board and management might think (along with) some of the company’s Melbourne-based cheer squad in the business media, the Rio Tinto offer is a dying daily and no one has the guts to ask BHP to update the market fully and transparently.
The credit crunch and slowing demand for iron ore and copper and other commodities, the implosion in European and US banking, and the growing toll of big deals being pulled for lack of finance, are sending signals that BHP’s 3.4 share offer for Rio is over.
It is a case of what regulators here and in Europe might think. After the ACC gave it the tick yesterday, BHP shares rose 5.6% by the close. In London they fell 4% because the investors are closer to the yawning black holes in finance across the continent and in the US.
Instead of listening to and reading platitudes from BHP’s chairman, Don Argus, and aggressive speeches from CEO, Marius Kloppers, the ASX and or ASIC should be asking BHP if it’s $US55 billion post bid “committed” finance package is still as firm, given the shaky state of some of the proposed managers and funders.
In fact you could argue that the bid has been on death’s door since March, when Bear Stearns failed and was rescued by the Fed. That was a mere month after the bid went formal (It was raised on November 8 last year at 3 shares for one and upgraded to 3.4 shares in February, when BHP put together its team of banks that would lend it $US40 billion). On October 2 I wrote: “BHP says it has a ‘committed banking financing facility’ from a group of banks lead by Barclays Capital, BNP Paribas, Citigroup Global Markets, Goldman Sachs International, HSBC, Banco Santander and UBS.
“UBS is a basket case, Santander is bedding down Alliance and Leicester and the parts of Bradford and Bingley it bought at the weekend, Citigroup is coping with taking over Wachovia in the US, (and selling unwanted loans and assets, half a trillion dollars worth); Barclays Capital is swallowing most of the US business of Lehman Brothers and Goldman Sachs is coping with being a fully regulated bank and not an investment bank and is looking to raise capital and nice, safe, boring deposits from individuals and corporates, not extend mega loans to the likes of BHP.”
Since then, Citigroup has been rescued, twice by the US Government, UBS has been rescued and recapitalised by the Swiss Government, Goldman Sachs is no longer an investment bank, but a full US bank and pulling in its horns; Santander of Spain is raising cash to recapitalise itself after spending up big, and then finding the Spanish housing market deflating and Barclays is raising $US7 billion in fresh capital from the Middle East because it doesn’t want UK Government money to help it recapitalise.
In other words, BHP’s banking squad is a collection of enfeebled basket cases, two of whom are on the Government teat. Reading the BHP statement issued last night there seems to be the impression that all these problems in the markets have suddenly appeared out of no where.
It has been obvious for months that BHP Billiton’s 3.4 share offer for rival Rio Tinto was doomed as debt markets tightened, making it more problematic that the deal would happen. Commodity prices have been collapsing since July, the drop accelerated from mid-September after the Lehman Brothers failure. The deepening US recession and China’s accelerating slump have been around for over six weeks, longer in the case of the US.
With the Fed throwing trillions of dollars at the US and global economies to stop the markets from freezing and producing a recession, there was never any chance BHP would be able to raise the money, or get the asset sales it needed to do.
Rio itself told us in an update a month or so ago that it has postponed some of the asset sales it had planned to make from the Alcan takeover. And yet the optimists at the top of BHP plowed on, denying the obvious.
They have wasted $US450 million in fees and charges (which is a worse offence in corporate terms than the $US2.1 billion impairment charge against the Ravensthorpe and Yabulu nickel projects in WA and Qld. That’s a write-down of $US2.1 billion on projects that cost $US2.8 billion from what the media claimed this morning). The Financial Times Lex column suggested that there might be a senior body out the door over the takeover; its too early for that.
Tomorrow’s Annual Meeting should tell us how shareholders think. The most amazing thing is that it took the BHP management and board months to realise that with a debt of only $US6.3 billion, BHP was ideally placed to ride out the crunch: taking over Rio would have imperiled the company. How they couldn’t understand that until this week is astonishing.
BHP had been protesting for months that as it was an all paper offer, the level of activity in the sharemarket was not a consideration, but that was special pleading. That’s for the future: the now is working out where the BHP decision leaves it and Rio.
Rio shares fell sharply overnight, BHP shares were stronger here yesterday:
In London trading Rio’s shares lost almost 30% of their value, down 723p at £17.27, BHP was one of the best performers, up 14.3% at £11.20.
Earlier, in Australian trading, BHP shares soared $2.84, or 12.1%, to $26.22 while Rio jumped $4.10, or 6.9%, to $63.90. Rio is badly wounded, as is its would be stalkers, Chinalco of China and Alcoa: their 14.9% stake is worth considerably less.
They can’t bid because there’s no FIRB approval and Alcoa itself is part of the walking wounded in the US. Rio chairman Paul Skinner is off to BP to bring his unique brand of management skills (he was at Shell before Rio). Skinner and the board chose Tom Albanese for CEO. After the $US38 billion purchase of Alcan, both deserve to go. Skinner’s self imposed departure might save Albanese. And will the shorts attack Rio now that it is freed from BHP and heavily in debt with slumping cashflows and earnings. The ASX should ask Rio for a guidance update, straight away.